Zakat

English: religious tax
Alternate spelling: Zakah

Definition: An obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute amongst the poor.

According to Islam, zakat – the third pillar of Islam – purifies wealth and souls. Zakat is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business.

There are two types of zakat:
Zakat al Fitr, which is payable by every Muslim able to pay at the end of Ramadan. This is also called Zakat al Nafs (poll tax).
Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate paid differs according to the type of property owned.

Saudi braces for major Takaful ranking reshuffling as operators begin to turn a profit

Saudi Arabia’s insurance companies are finally making profits thanks to regulatory interventions, ending a protracted period of losses for many of the 33 cooperative operators caught in the fiercely competitive market — also the largest Takaful market in the world — where the value of insurance is still severely underappreciated by the vast majority. This, VINEETA TAN writes, has caused a major shakeup in rankings especially among the mid-tier segment.

Back into black
As many as 28 insurers realized stronger earnings in 2016, with nine swinging into the black, recovering from losses the year before; the market as a collective more than doubled its pre-Zakat profits to SAR2.5 billion (US$666.32 million) from SAR1 billion (US$266.53 million) in 2015, according to figures from AM Best. This is in stark contrast to previous years when almost half of the operators were deep in the red, and when the market behaved almost like a duopoly with two of the largest companies by gross premium revenue (Tawuniya and BUPA) controlling 123% of total market profits; 12 months later, their share contracted by almost half to 57% as other participants raised their earnings capabilities.

The tables have turned
While the top tier of Takaful league remains unchanged, the reverberations from the change in profitability profile have dramatically altered the rankings of insurers in the mid and lower tier (See Table 1). 

In the mid-tier segment for example, while Malath Cooperative and Al Rajhi Company for Cooperative Insurance maintain their dominance and even increasing their share of gross premiums by three percentage points to 45%, Salama Cooperative and Alinma Tokio Marine both surged eight places; while Al Sagr Cooperative and Amana Cooperative dropped 19 and 10 places respectively.

“At the same time, Medgulf, the third-largest insurer in the market lost ground as its internal restructuring and regulatory intervention has meant that the company was unable to write significant volumes of business for long periods,” explained AM Best, which expects the mid-tier to be rife with movements as operators recalibrate their strategies between active portfolio management and economies of scale.

Sustainable or not?
This turning of the tables is largely due to strict prudential measures by the Saudi Arabian Monetary Authority (SAMA) in 2014 to end the aggressive price wars between market players, compelling them to revise their risky underwriting strategies. While these new rules initially drained earnings, however they are finally bearing fruit, although the bull run may be short-lived.

With the regulator, SAMA, implementing actuarial reserving practices in 2014, and evidence of increased reserve prudency in 2015, many insurers have felt over-reserved as at year-end 2015,” explained AM Best. “As loss experience in 2016 has been substantially better than expected (driven mainly by improved premium rates), many insurers would have seen material levels of reserve releases during the year, augmenting their technical income.” Technical income was more than twice as high in 2016 at SAR1.7 billion (US$453.1 million) against SAR600 million (US$159.92 million) the year before.

It, however, remains to be seen if the Saudi Takaful market would be able to sustain its stellar 2016 performance, although current market conditions of weak oil prices and possible rise in operating expenses driven by a stronger focus on enhancing service quality (rather than undercutting prices to capture businesses), point to a likely moderation in premium growth. Things may have improved drastically, but the Saudi insurance market remains as competitive as ever.

Fantastic year for Saudi Takaful operators – but is the growth sustainable?

SAUDI ARABIA: Saudi Arabia’s insurance companies are finally making profits thanks to regulatory interventions, ending a protracted period of losses for many of the 33 cooperative operators caught in the fiercely competitive market – also the largest Takaful market in the world –  where the value of insurance is still severely underappreciated by the vast majority.

As many as 28 insurers realized stronger earnings in 2016, with nine swinging into the black, recovering from losses the year before; the market as a collective more than doubled its pre-Zakat profits to SAR2.5 billion (US$666.32 million) from SAR1 billion (US$266.53 million) in 2015, according to figures from AM Best. This is in stark contrast to previous years when almost half of the operators were deep in the red, and when the market behaved almost like a duopoly with two of the largest companies by gross premium revenue (Tawuniya and BUPA) controlling 123% of total market profits; 12 months later, their share contracted by almost half to 57% as other participants raised their earnings capabilities.

This turning of the tables is largely due to strict prudential measures by the Saudi Arabian Monetary Authority (SAMA) in 2014 to end the aggressive price wars between market players, compelling them to revise their risky underwriting strategies. While these new rules initially drained earnings, however they are finally bearing fruit, although the bull run may be short-lived.

“With the regulator, SAMA, implementing actuarial reserving practices in 2014, and evidence of increased reserve prudency in 2015, many insurers have felt over-reserved as at year-end 2015,” explained AM Best. “As loss experience in 2016 has been substantially better than expected (driven mainly by improved premium rates), many insurers would have seen material levels of reserve releases during the year, augmenting their technical income.” Technical income was more than twice as high in 2016 at SAR1.7 billion (US$453.1 million) against SAR600 million (US$159.92 million) the year before.

It, however, remains to be seen if the Saudi Takaful market would be able to sustain its stellar 2016 performance, although current market conditions of weak oil prices and possible rise in operating expenses driven by a stronger focus on enhancing service quality (rather than undercutting prices to capture businesses), point to a likely moderation in premium growth. Things may have improved drastically, but the Saudi insurance market remains as competitive as ever.

Humanitarian action via the Islamic finance route

If there is a particular moment in the modern world’s timeline that requires urgent humanitarian action combined with responsible financial investment, now is the time. The entire world seems to be undergoing a severe stress test with a need for stable financial markets and transparency in transactions and the refugee crisis and climate change among many issues at hand. What if the main global actors, be it in politics or finance, could tackle the world’s most pressing issues by utilizing responsible financial instruments? That is what the International Federation of Red Cross and Red Crescent Societies (IFRC) seems to be doing when it recently opted to go down the Islamic finance route, in order to raise funds for some of the world’s humanitarian projects. DANIAL IDRAKI brings you the story. 

IFRC recently signed an MoU with International Center for Education in Islamic Finance (INCEIF) to leverage on Islamic social finance opportunities as well as develop strategies and fundraising tools for a number of the organization’s humanitarian aid programs, which include the design and development of social impact Sukuk, Waqf and Zakat endowment funds and other mechanisms that make use of obligatory and voluntary faith-based donations.

On its part, INCEIF will provide guidance on ways to tap Islamic social finance by connecting its alumni network in 80 countries with National Red Cross and Red Crescent Societies and advocating for the direct funding of programs that alleviate suffering, build resilience and promote human dignity. 

In a world of negative-yielding bonds, perhaps social impact investment with the goal of eradicating suffering and poverty isn’t such a bad idea, given the severity of the current humanitarian conditions, enhanced by the complexity of the global refugee crisis. Instead of gunning for financial returns, investors could approach such social impact investment as a long-term payoff that would benefit the wider society, which is what Islamic finance’s ultimate objective really is all about: for the betterment of the Ummah.

Dr Jemilah Mahmood, the IFRC’s undersecretary-general for partnerships, noted that Islamic social financing has the potential to help address significant financial challenges in meeting the needs of millions of people caught in crises and poverty. “We are keen to explore innovative ways the Islamic finance sector can work with Red Cross and Red Crescent Societies and demonstrate solidarity and principled action to save lives and promote dignity. We will be eager to see Islamic social finance contribute to strengthening communities and realizing the IFRC’s commitment of leaving no one behind,” Dr Jemilah explained previously.

As the IFRC and INCEIF blaze through a new and challenging journey of addressing humanitarian issues by utilizing Shariah compliant instruments, this could well be a catalyst for other NGOs or humanitarian organizations to consider turning to the well-laid-out path of Islamic finance in their humanitarian undertaking.

At a time of growing inequity in which the world’s eight richest people own the same amount of wealth as the poorest half of the world’s population (according to Oxfam’s recent report), the current global humanitarian situation presents Islamic financial instruments a great opportunity to help play a key role in resolving some of the world’s most pressing issues, and at the same time help achieve the sustainable development goals that were laid out by the United Nations.

Maldives: South Asia’s Islamic finance beacon?

Known for its pristine beaches, blue lagoons and coral reefs, the Maldives is also making a name for itself in the Islamic finance universe. With a strong commitment from the government to position the Muslim nation of over 300,000 as a South Asian hub for Islamic finance and the Halal sector, the country has over the last few years rapidly built its Islamic finance industry. VINEETA TAN canvasses the Maldives’s Islamic finance landscape.

Regulatory landscape
The Maldives has in place a basic regulatory infrastructure for Islamic finance. Regulated by the Maldives Monetary Authority (MMA) and the Capital Market Development Authority (CMDA): Shariah banking falls under Islamic Banking Regulation 2011 overseen by the MMA while the CMDA has enacted several regulations for the Islamic capital markets including for Sukuk issuance and Islamic securities screening. In 2015, a Zakat bill and regulation for Waqf were also drafted with the assistance of the IDB and the Islamic Research and Training Institute.

There are still legal gaps to be met, for example, the tropical nation lacks SPV laws as well as trust laws, posing challenges in issuing Sukuk. Nonetheless, the regulators are working on developing a comprehensive and effective regulatory framework.

Takaful
The Maldives’s Islamic finance story first began in 2005 in the form of Amana Takaful Maldives which offered general insurance products. In 2011, the operator became the first Shariah compliant equity stock to be listed on the Maldives Stock Exchange. The operator is also in talks with the country’s sole Islamic bank, Maldives Islamic Bank (MIB), to set up a bancaTakaful partnership. 

The Takaful sector is showing promising signs of growth: in 2014, Allied Insurance Maldives — the largest local insurer — launched an Islamic window, Ayady Takaful, which has remained active. In 2017, Ayady Takaful partnered with the National Disaster Management Center to roll out a new Takaful scheme for natural disasters.

Banking and finance
There is one fully-fledged Islamic bank in the Maldives: MIB, established in 2011 in collaboration between the Islamic Corporation for the Development of the Private Sector and the Maldivian government. Islamic banking services are also extended by the Bank of Maldives — the national bank — which launched its Islamic window in 2015 and opened a dedicated Islamic banking branch in 2016. There were also talks about establishing a second fully-fledged Islamic bank; however, that has not materialized yet. Predominantly serving the retail and corporate market, MIB has plans to venture into investment banking to lead manage Sukuk. In 2012, the first-ever Islamic window of a non-banking financial institution was introduced (HDFC Amna).

The demand for Islamic financial services is significant as demonstrated by the measures taken by both banking and non-banking financial institutions to introduce such facilities: Housing Development Finance Corporation (HDFC), which launched an Islamic product in May 2016, in the third quarter of 2016 decided to convert all existing property facilities to be compliant with the Shariah by discontinuing compound interest — all new products offered will be Islamic moving forward. In the same year, hire-purchase company Litus Automobiles also converted its entire portfolio to be Shariah compliant. They follow in the footsteps of Alia Investment Maldives which became the first private firm to engage in Islamic finance when it Islamized its portfolio in 2013.

To drive up the market share of Islamic finance, the government in January 2016 set up a dedicated firm, Khazana Maldives, tasked with developing Shariah finance, as well as established the Maldives Center for Islamic Finance (MCIF) with the objective of propelling the nation as a hub for Islamic finance and the Halal industry for South Asia.

Sukuk 
While relatively new in the Islamic finance scene, the Maldives has issued Sukuk: in 2013 it welcomed its first corporate Sukuk (a Mudarabah paper issued by HDFC), and the government offered the region’s first Islamic treasury bill, which followed a private sovereign Sukuk Wakalah/Mudarabah facility which used oil trading as an underlying asset. The HDFC was supposed to issue its sophomore Sukuk in 2016; however, that was postponed. To be listed on the Maldives Stock Exchange, it was planned that the MVR200 million (US$12.58 million) Sukuk Mudarabah paper would carry a tenor of 10 years. IFN understands that the Ministry of Finance is also planning a sovereign dollar-denominated Sukuk it hopes to issue in 2017.

Shariah funds
Taking a leaf out of Malaysia’s book, the South Asian country wanted to also create a Lembaga Tabung Haji equivalent for the Maldives as a means to develop its Shariah mutual fund industry. The idea was met with political resistance — a Hajj-related bill was rejected by the parliament; as a result, proponents of the Hajj pilgrims fund decided to set up a state-owned enterprise instead, the Maldives Hajj Corporation, formed under a presidential decree in 2013. In 2014, the Ministry of Islamic Affairs set up a Waqf fund. The fund first invested in a real estate project, the Darul Eman Project, which has been successful with the entire building completed and rented out in 2016.

The Maldives Center for Islamic Finance is embarking on a project to combine Waqf and Islamic tourism to create a sustainable fund to alleviate poverty. 

Human capital development
The Maldives is also focusing on developing its Islamic finance talent pool: in 2016, MCIF and the Islamic University of Maldives (IUM) entered into several agreements with AlHuda Center of Islamic Banking and Economics in the areas of education and research. The CMDA signed an MoU with Malaysia’s International Center for Education in Islamic Finance to develop Islamic finance curricula at foundation, diploma and bachelor levels, to be available through the IUM in 2017. The MCIF, on the other hand, signed an MoU with the Women on Boards in an effort to attract more women into the Islamic finance industry by means of training and research among others.

Searching for alternatives

These are uncertain times and with the global debt market losing steam, could Sukuk – a long industry favorite – lose its luster and if so, what alternative investment instruments are there for Shariah-conscious investors? Quite a number, so it seems, and rather compelling ones at that as explored in our cover story this week.

In this issue of IFN, two recurring themes emerge: fintech and Jordan. Good or bad, the disruption of fintech has to be embraced and not rejected as discussed in our sector analysis and expert contribution this week; our journalist also brings you an exclusive look at Dubai’s recently launched fintech accelerator program and how the government is positioning it to support fintech for Islamic finance. As part of our Jordan focus this week, we bring you one feature on the Kingdom’s Islamic finance landscape as well as an in-depth look at the country’s award-winning maiden sovereign Sukuk. We continue last week’s intriguing discussion on participation finance amid Trump and the Brexit crisis in the final part of a Special Report by Khalid Howladar, the managing director and founder of Accreditus. We also have a piece by the World Gold Council on how the yellow metal is powering the growth of Islamic finance and an article on Zakat as a global income inequality solution by Kagiso Asset Management. And of course, we wrap up the issue with updates from our on-the-ground correspondents worldwide and latest headlines impacting the global Islamic finance industry over the past week.

As usual, we wish our readers an informative and insightful read.

Technology in Islamic finance: shifting sentiments

The financial industry as a whole is undergoing massive disruption due to the digital revolution that is being driven by financial technology (fintech) companies, throwing a curve ball to the markets and established industry players. Islamic financial services providers are no exception to the evolving landscape, and market players are jumping on the bandwagon to take advantage of opportunities in the new era, rather than be left behind. DANIAL IDRAKI takes a look at recent developments in this exciting space.

Overview
Fintech is revolutionizing the way customers pay for goods and services, transfer money between accounts and conduct cross-border transactions. Driven by innovative start-ups, the booming fintech industry is capturing traditional market share with its approach and there have been calls for traditional financial services companies to tie up with fintech companies to leverage on their penetration levels, rather than compete head-on.

According to Accenture, global fintech investment grew by 75% in 2015 to reach US$22.3 billion, driven by deal flow across continental Europe and Asia-Pacific, while more than US$50 billion have been invested in almost 2,500 companies globally since 2010. Innovators and entrepreneurs in the fintech sector are redefining the way in which consumers store, save, borrow, invest, move, spend and protect money.

Middle East
Dubai International Financial Center (DIFC) launched the region’s first fintech accelerator in partnership with Accenture earlier this year. The launch is expected to provide better exposure to financial services technology in the Middle East, Africa and South Asia. The accelerator is aimed at promoting knowledge in areas such as trade finance and Shariah-based services, among young leaders and entrepreneurs. 

This follows Abu Dhabi Global Market’s footstep after it launched the Fintech RegLab, which is designed to tailor regulatory regime for fintech participants and to foster innovation within the UAE financial service market for both new market entrants and existing financial institutions. The RegLab also allows participants to develop and test their fintech proposition without having to worry about undue regulatory burdens.

Over in Bahrain, the central bank is considering introducing regulations on fintech and is inviting technology companies to set up their offices in Bahrain and use it as a base to serve the entire GCC and Middle East region, said Khalid Hamad, the chairman of the Waqf Fund and the executive director of banking supervision at the Central Bank of Bahrain, in December 2016.

Asia
In Malaysia, the Securities Commission Malaysia (SC) signed an MoU with MIMOS, the nation’s research and development center in information and communications technology, to jointly develop a capital market advanced analytics platform. The partnership will allow it to process a higher volume of data from a variety of sources beyond the traditional data sets, facilitate the usage of RegTech or technology to enhance regulatory effectiveness and build Malaysia’s big data capability in the capital market. The SC also issued licenses to peer-to-peer and equity crowdfunding platforms in 2016.

Bank Negara Malaysia (BNM) had in October last year issued details of the fintech regulatory sandbox framework, following a one-month consultation on the proposed framework released on the 29th July 2016. The regulatory sandbox will enable the experimentation of fintech solution in a live environment, subject to appropriate safeguards and regulatory requirements. 

Over in neighbouring Indonesia, Bank Indonesia launched the Bank Indonesia Fintech Office in Jakarta in November 2016 as the country seeks to facilitate the development of innovation in a technology-based financial ecosystem and improve the competitiveness of the fintech industry.

In Pakistan, Meezan Bank partnered with Inov8 in December last year to develop the latter’s FalconPay Payment’s digital ecosystem powered by MasterCard’s digital wallet solution, Masterpass.  The Islamic bank said that the partnership is aimed at building a platform for customers to use its services on-the-go, with online purchases and bookings. Meezan Bank will be the first bank in Pakistan to allow linking of customers’ accounts to that of FalconPay Payments.

Over in India, meanwhile, a team comprising software and hardware engineers and economic experts in Rajasthan has conceived an e-currency system for Islamic banking by creating an income cycle with the capacity to rotate itself ad infinitum. The system — 13 years in the making — is designed as an electronic currency machine for banking through the digitization of money and can be used for interest-free transactions, risk-sharing, asset and service backing and contractual certainty, enabling banks to use their reserves without any limitation for any number of times.

Europe
In January 2017, Luxembourg-based EETHIQ Advisors announced a strategic partnership with University of Luxembourg’s SnT Interdisciplinary Centre for Security, Reliability and Trust, to form a joint research program on blockchain technology and smart contacts for ethical and Islamic finance. 

The firm is also collaborating with French asset manager 570 AM on two fintech initiatives, EETHIQ founder and managing director Rachid Ouaich told IFN. The first project is to expand 570 AM’s Shariah compliant digital mortgage offering to other European countries beyond France, while the second is to develop a personal finance management platform, which is currently still at the research and development stage. The app, which will have the capability to link to banking accounts, will incorporate Shariah compliant financial products and automated Zakat calculations.

Zakat – an Islamic solution to global income inequality

Global economic growth has been significantly weak in the years since the 2008 financial crisis. The US has experienced the weakest cyclical recovery since 1958 and, due to a double dip recession in the region, the eurozone’s GDP has only just recovered to pre-financial crisis levels. This is despite the economic backdrop being extremely accommodative with aggressive easing of policy rates by central banks in most developed economies. In addition, unconventional stimulus measures were also implemented in Europe and the US. ABDUL DAVID analyzes the global income space and the role that Zakat plays in it. 

Since the financial crisis, total global debt levels have continued to increase according to a 2015 report by McKinsey Global Institute titled ‘Debt and (not much) deleveraging’, with a particularly sharp rise in China. In addition, global monetary policy stimulus is currently at record high levels, driving down global debt yields to record low levels with some developed countries enjoying negative yields.

The accommodative backdrop has significantly boosted asset prices with most global bond and equity markets now trading at very high ratings by historic standards, despite weak fundamental outlooks. In our view, this disconnect between low real economic growth (and the resultant low income growth for workers) and soaring asset prices (which disproportionately benefit the rich) is contributing to unsustainable levels of income inequality. No wonder that the general population in most developed countries have become disillusioned with their economic disenfranchisement and are flexing their muscle at the ballot box – the Brexit vote in the UK and the rise of Donald Trump as the president of the US are symptomatic of widespread unhappiness with the economic construct in both of these countries. 

Chart 1, which is taken from the 2012 report titled ‘Global Income Inequality by the Numbers: in History and Now’ by Branko Milanovic of the World Bank, illustrates the real increases in incomes across different percentiles of the global population. The shape of the chart (dubbed the elephant chart) tells a fascinating story:

A.    The bottom third of the population experienced a healthy real income increase of between 40% and 70% (with the exception of the very poorest 5% of the world who have seen flat real income growth). This general improvement is largely due to the rapid economic growth in China that, over the last decade, has seen more than 300 million Chinese people move out of extreme poverty.
B.    Within the lower middle classes, there have been solid gains, mostly within emerging markets (China is again a strong beneficiary).
C.    The decline in this section has primarily hurt working class citizens of developed countries and offers a compelling explanation of the worrying trend toward the anti-establishment populism witnessed across Europe (Brexit) and the US (the rise of Trump).
D.    The very rich have had very healthy increases in real income.

The data behind the 2012 World Bank study is slightly dated, but our assessment is that the trends in this picture have accelerated post the financial crisis, and cannot be sustained forever. At the 2017 World Economic Forum in Davos, the extent of the global inequality was highlighted by the fact that the world’s five richest individuals are worth more than the poorest half of the world’s population – that is over 3.6 billion people!

As is evidenced from the aforementioned statistics, a key shortcoming of traditional income tax systems is that they are not effective in addressing inequality, particularly the gap between middle income (tax-paying) households and the very rich. The rich derive a large proportion of their wealth gains from investments rather than income, and so there are now increasing calls for asset-based taxes to augment and complement traditional income-based tax systems.

The popular French economist Thomas Piketty recently called for property taxes for the wealthy to address inequality between the poor and the wealthy. In contrast, the Islamic system of Zakat meets the criteria of an efficient wealth tax. Zakat, which literally means to purify, compels Muslims to spend 2.5% of their latent wealth, ie any assets that remained unutilized for more than a calendar year, on the poor. The system of Zakat therefore encourages the productive use of assets and wealth to avoid paying the Zakat wealth tax.

A key feature of the Zakat system is the requirement that the funds raised should be spent on the most marginalized in society: the poor and destitute. The Islamic system of Zakat would therefore be an efficient and effective method to redress the rising global income inequality, both in terms of the income transfer and the potential to better utilize unused wealth for the benefit of society.

Islamic finance and fintech – what can be the correlation?

Fintech is a portmanteau of money-related innovations that depicts a rising monetary administration part in the 21st century. Originally, the term applied to technology and relates to the back-end of established consumer and trade financial institutions. SALEEM UDDIN FAISAL delves further. 

It’s very important to integrate the current Islamic finance system with fintech solutions in order to address the requirements of a US$2.1 trillion market. Fintech can get yet another US$1 trillion for Islamic finance with the use of technology and reach the areas where Islamic finance has limited or no access.

The main objective of fintech is to bring down the cost of intermediaries and return the same savings to end users. Keeping an eye on the same objectives, Islamic finance can also provide even more robust and cost-effective solutions to customers by using fintech. An example is blockchain which is an open ledger system with no central governing authority and has very low chances of getting hacked due to data encryption and the decentralized topology. Security isn’t a part of the system, it is the system. Blockchain is also going beyond finance. A blockchain is a public ledger of all bitcoin (cryptocurrency) transactions that have ever been executed. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order.

By permitting computerized data to be appropriated yet not duplicated, blockchain innovation has provided the foundation for another kind of web. Initially formulated for the digital money bitcoin, the tech community is presently finding other potential uses for such a brilliant innovation.

Bitcoin has been called ‘digital gold’, and for good reasons; to date, the aggregate estimation of such cash is near US$14 billion. Blockchain can make different sorts of digital values. Like the internet (or your vehicle), you don’t have to know how the blockchain attempts to utilize it. In any case, having an essential information of this new innovation demonstrates why it’s viewed as progressive and revolutionary.

Blockchain innovation resembles the internet in that it has an inherent robustness. By putting away blocks of data that are indistinguishable over its system, therefore blockchain cannot:

  • be controlled by any single entity, and
  • has no single point of failure.

Blockchain is considerably more secure than the current customary innovation of centralized databases of companies. For example, banks, traders, stock exchanges and so on are more vulnerable to cyberattacks, notwithstanding securing them since a hacker who breaks in can control the whole system.

Bitcoin was invented in 2008 and since then, the bitcoin blockchain has worked without critical interruption. To date, any issues connected with bitcoin have been because of mismanagement, if any. As it were, these issues originate from bad intentions and human mistakes, not blemishes in the fundamental ideas. The innovation itself was not intended to be abused and it absolutely depends on how it will be utilized.

The internet itself has ended up being sturdy for just about 30 years. It has a reputation that looks promising for blockchain innovation as it keeps on being developed.

The blockchain network lives in a condition of accord, one that naturally checks in with itself like every 10 minutes. A sort of self-reviewing and auditing environment of digital value, the system accommodates each exchange that occurs in a 10-minute interim. Every gathering of these exchanges is alluded to as a ‘block’. Two vital properties result from this:

  • Transparency – information is inserted inside the system all in all; by definition it is open to the public.
  • It can’t be undermined – modifying any unit of data on the blockchain would mean utilizing an enormous measure of figuring energy to supersede the whole system.

By outline, the blockchain is a decentralized technology. Anything that happens on it is a function of the network as a whole. Some imperative ramifications stem from this. By making another approach to check exchanges, parts of a customary business could get to be distinctly superfluous. Stock exchange transactions turn out to be practically synchronous on the blockchain, for example – or it could be a sort of record-keeping, similar to a land registry, completely open where decentralization is now a reality.

A worldwide system of computers uses blockchain innovation to mutually deal with the database that records bitcoin transactions. That is, bitcoin is overseen by its system, and no one focal power. Decentralization implies the system works on a client to-client (or peer-to-peer) premise. The types of mass-coordinated effort this makes conceivable are recently starting to be researched.

In addition to blockchain, one must also keep in mind the platform for such technology called Ethereum, an open-source platform to build decentralized applications that run exactly as programmed without any chance of fraud, censorship or third-party interference; we can also use the platform more and consider using it smartly.

Islamic finance can take advantage of fintech in many ways and enhance its current product offerings like Sukuk, Murabahah, Ijarah, Waqaf, Zakat, etc. Fintech can be useful in many ways, for example, in smart contracts, crowdfunding, intellectual property, renewal energy, anti-money laundering and know your customer processes, land title registration, stock exchange, etc.

By using blockchain and Ethereum, Islamic finance experts can even think about designing more innovative products that can further increase the penetration to markets beyond the current capacity, hence technology can assist capacity-building and bring product offerings to a worldwide audience.
In my opinion, Islamic finance needs to consider blockchain as a technology that can literally reduce the cost of transactions, instead of taking such differences into income use for either charity or public welfare.

As per the World Bank, there are approximately two billion adults categorized as ‘unbanked’ which is an exciting opportunity to bank them within Islamic finance through fintech.

In a nutshell, fintech is endorsing the fundamentals of Islamic finance, for example, risk-sharing, trust, transparency, justice, efficiency and equality.

Islamic finance should act fast to capture the market by using fintech to cover those territories that it has not covered before.

I would like to end my article by narrating verse 5:2 from the Quran which says: “Help one another in (the) righteousness and (the) piety, but (do) not help one another in (the) sin and (the) transgression. And fear Allah; indeed, Allah (is) severe (in) (the) punishment.”

Saleem uddin Faisal is the founder and CEO of DanOwa (DO) Group and DanOwa SofiTech (DOST). He can be contacted at info@danowagroup.org.

IFN weekly market roundup: 14th – 20th January 2017

The week has seen a flurry of activities in the Islamic finance world with sovereign Sukuk finding solid grounds and their corporate counterparts promising potential for 2017. The industry is taking regulations seriously with new and revamped legislation underway. Institutions and firms are announcing their fiscal results for 2016, with an analysis of last year and expectations for the new year. Europe brings in good news in the fintech sector as Fitch announces Takaful prospects for two Southeast Asian Islamic powerhouses.

SOVEREIGN SUKUK
From Asia, the government of Indonesia auctioned sovereign Sukuk (SPN-S 11072017 and four project-based Sukuk series), with an indicative target of IDR6 trillion (US$449.4 million) on the 24th January. Brunei issued its 141st series of short-term Sukuk Ijarah for BN$100 million (US$69.77 million). Maturing on the 13th April 2017, the 91-day facility was priced at 0.63%.

Qatar’s central bank sold QAR8 billion (US$2.2 billion)-worth of Sukuk on the 16th January. The  while the Central Bank of Bahrain’s monthly Sukuk Salam Islamic securities has been 100% fully subscribed. 
In Africa, Egypt made headlines this week. The country could be issuing a US dollar Sukuk facility in 2017, after the investor meetings for its conventional bond that are scheduled to end on the 23rd January.

NON-SOVEREIGN SUKUK
The week saw potential Sukuk announcements for 2017 with Bahrain’s Nogaholding engaging banks for either an Islamic or conventional facility, reported Reuters; and Saudi’s Jabal Omar looking into the Sukuk market this year, according to its CEO, Yasser Al Sharif in an interview with Bloomberg. 

From Southeast Asia, Fitch Ratings said that Malaysian firms continue to be the most active corporate Sukuk issuers. Fitch expects Sukuk issuance to maintain growth momentum in 2017 and in turn bring in more Sukuk alongside conventional bonds to the market. Sunway Treasury Sukuk of Malaysia has issued RM100 million (US$22.43 million)-worth of Islamic commercial papers on the 19th January 2017. 

The Investment Corporation of Dubai is preparing to launch its US$700 million US dollar Sukuk by next week, after a five-day roadshow in Asia, the Middle East and Europe, according to GlobalCapital. 

In Bahrain, the bourse has listed a six-month Sukuk Ijarah facility worth BHD26 million (US$68.47 million) and three other treasury bills, amounting to BHD201 million (US$529.34 million), according to a statement. 

REGULATIONS
The Chartered Institute of Islamic Finance Professionals issued the CIIF Code of Ethics and CIIF Standards of Professional Conduct which set out principles on par with other codes of ethics by its peers, both foreign and local.

Over in the Middle East, the government of Azerbaijan signed a grant agreement with the IDB for the provision of technical assistance in drafting an Islamic financing legislative base, according to Trend. Iran’s Banking Reform Bill, a law outlining reforms in the country’s banking sector, will reportedly be finalized in the parliament’s spring session.

BANKING & FINANCE
The National Transmission and Despatch Company of Pakistan secured Islamic and conventional financing facilities worth PKR18 billion (US$171.43 million) to finance the installation of a 250 km 500 kV transmission line from Thar Desert to Matiari district, according to The News. The country’s quarterly housing finance review by the central bank also reported that Islamic banks led in terms of home financings compared to conventional banks in the third quarter of 2016. The total amount of financings by Islamic banks was PKR25.8 billion (US$245.94 million) during the period.

Abu Dhabi Islamic Bank has introduced its first Islamic equity investment structured note of 2017 to aid investors’ exposure to undervalued blue chip companies from a range of sectors. 

The International Center for Education in Islamic Finance has signed an MoU with the International Federation of Red Cross and Red Crescent Societies to research financial instruments to increase humanitarian initiatives, including the development of Sukuk social impact bonds, Waqf and Zakat endowment funds among others. 

NEW ENTITIES
Herbert Smith Freehills announced that it has received a Qualified Foreign Law Firm license from Bar Council Malaysia. Its new Malaysian office will open in May 2017.

ASSET MANAGEMENT
In Malaysia, the takeup of the Employees Provident Fund’s Simpanan Shariah reached RM59.03 billion (US$13.22 billion) of the initial RM100 billion (US$22.43 billion). The fund also allocated RM50 billion (US$11.22 billion) as further injection for Simpanan Shariah 2018.

Securities & Investment Company entered into a strategic partnership with Trucial Investment Partners for the Shariah compliant SICO Trucial US Real Estate Income Fund estimated to be worth US$50 million, possibly launching in the second quarter of 2017. 

FINTECH
EETHIQ Advisors from Luxembourg and the French asset manager 570 AM are partnering on two fintech initiatives, EETHIQ founder and managing director Rachid Ouaich told IFN. The first project is to increase 570 AM’s Shariah compliant digital mortgage offering to European countries other than France; while the second is to create a personal finance management platform with the capability to link to banking accounts that would incorporate Shariah compliant financial products and automated Zakat calculations.

TAKAFUL
Fitch Ratings opined that Takaful products demand is low in Indonesia caused by a lack of awareness and a robust Islamic finance system. As for Malaysia, the country’s Takaful industry continues to achieve higher growth than the conventional sector, contributed by a firm presence and consumer awareness.

Agrobank, a Shariah compliant institution, established Agro Nurani, the country’s first Takaful coverage for persons with disabilities. The scheme offers benefits including cash allowance for disabilities caused by accidents. 

MOVES 
Norashikin Mohd Kassim has left CIMB-Principal Islamic Asset Management (CIMB-Principal IAM) to join an Islamic bank; Chief Investment Officer Mohd Fadzil Mohamed has stepped up as acting CEO.

Dubai International Financial Center Authority welcomed its new CFO, Yazan Mohamad Nasser. Yazan was previously the CFO for Emaar Malls with 30 years of experience in finance and audit. 

Aljazira Takaful Taawuni Company

SAUDI ARABIA: Aljazira Takaful Taawuni Company achieved a 46.76% growth in net profit before Zakat to reach SAR25.92 million (US$6.91 million) in 2016 from SAR17.66 million (US$4.71 million) it posted in the previous year, while its net profit before Zakat for the fourth quarter of 2016 also rose 42.55% year-on-year to reach SAR7.53 million (US$2.01 million) from SAR5.29 million (US$1.41 million) in the corresponding quarter of 2015, according to a bourse filing.

 

 

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